Fitch Upgrades Localiza's IDR to 'BBB'; Outlook Stable
RIO DE JANEIRO -- December 5, 2013
Fitch Ratings has upgraded Localiza Rent a Car S.A.'s (Localiza) ratings as
--Foreign currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Local currency IDR to 'BBB' from 'BBB-'
--Long-term National Scale Rating to 'AAA(bra)' from 'AA+(bra)';
--Unsecured fifth and sixth debenture issuance to 'AAA(bra)' from 'AA+(bra)'.
Fitch has simultaneously assigned an 'AAA(bra)' rating to Localiza's unsecured
seventh debenture issuance due in 2021 in the amount of BRL500 million. The
proceeds from the issuance will be used to refinance debt and to support
working capital requirements.
The Outlook for Localiza's corporate ratings has been revised to Stable from
The upgrade reflects Localiza's proven ability to adjust its business model to
consistently allow financial flexibility to withstand changes in the economic
cycle while preserving its healthy capital structure and credit metrics.
Fitch's expects that Localiza's performance will weather the current
environment of slower economic growth without damaging its consistent
performance and credit metrics.
Localiza's 'BBB' rating reflects its distinguished and dominant business
position within the car and fleet rental industry in Brazil, its strong
operational efficiency, as well as its track record of a conservative capital
structure combined with robust liquidity levels. Localiza's sizable pool of
unencumbered fleet is also considered a source of liquidity. As of Sept. 30
2013, the company reported a fleet market value of approximately BRL2.7
billion, which corresponded to a net debt coverage of 2.2x.
Competitive Advantages Support Strong Business Profile
Localiza has a very strong competitive position with a market presence that is
nearly four times larger than its closest competitor. The company's leadership
gives it a strong negotiating power with the automobile manufacturers and
enable it to efficiently dilute fixed costs. Localiza's prominent used car
sales distribution channel further supports its competitive advantages and
enhances financial flexibility. The company has a low cost of financing and
strong access to the local debt markets, which further improves its
Well-Positioned to Face Industry Risks
Competition is likely to increase, while inflation costs have already
pressured Localiza's operating profitability. The company has the challenge to
seek alternatives in order to partially offset some loss in operating margin
as a result of its conservative strategy of maintaining market share by not
passing along inflation to rental rates. Going forward, Localiza's solid
business expertise and conservative approach to pricing strategy will be
fundamental to avoiding deterioration in its profitability, as Fitch expects
some deceleration in the used car market during 2014. Localiza's performance
is partly connected to its pricing strategy for selling used vehicles.
Cash Flow Expansion and Financial Flexibility Persist
Localiza continued to improve its operating cash flow generation during 2013,
although at lower growth rates. Lower GDP growth and stronger competition have
somewhat limited further business expansion. As of (LTM) Sept. 30, 2013, net
revenues grew 5% from 2012, reaching BRL3.4 billion, while operating fleet
growth was 7%. In the same period, EBITDAR and funds from operations (FFO)
increased to BRL1 billion and BRL724 billion, respectively, compared with
BRL979 million and BRL687 million. During 2011, these figures were BRL903
million and BRL537 million, respectively. The greater labor costs and store
rentals have been pressuring Localiza's operating margins, limiting scale
gains. Over the LTM ended Sept. 30 2013, EBITDAR margin remained relatively
stable at 30.6%, which is still quite consistent with its historical range
between 29% and 31%. Nevertheless, going forward Fitch foresees some decline
in operating margins, with the EBITDAR margins ranging from 26%-29%.
The car and fleet rental industry demands significant investments in fleet
renewal to support the business growth. The company has successfully developed
an asset sales strategy that allows it to sell around 70,000 used vehicles per
year. This has enabled Localiza to sell vehicles consistently, including
during the negative cycles of the industry and difficult economic
environments, as evidenced during the first half of 2009. The proceeds from
car sales have largely funded fleet renewal, given the significant discounts
obtained from auto manufacturers for new vehicles. The potential market value
of its relatively modern vehicle fleet is about 2.2x the value of its net
debt. Localiza could monetize these assets in the event of a cash flow crisis,
since they are not linked to guarantees. During LTM Sept. 30, 2013, capex for
fleet renewal totaled BRL1.7 billion, and capex for growth reached BRL222
million. To offset these disbursements, proceeds from used car sales totaled
Strong Liquidity Profile
Localiza has consistently maintained a strong liquidity position. On Sept. 30,
2013, the company had total debt of BRL2 billion and cash and marketable
securities of BRL791 million. On a pro forma basis considering the recent
debentures issuance (BRL500 million), Localiza's cash balance supports debt
schedule amortization up to 2016. The company's management has adopted a
conservative and proactive financial strategy to limit the risks associated
with its exposure to the cyclical and capital intensive nature of its
business. Localiza's sizable pool of unencumbered fleet is also considered a
source of liquidity. As of Sept. 30 2013, the company reported a fleet market
value of approximately BRL2.7 billion.
Strong Credit Metrics
The company has a track record of strong credit protection measures for the
industry. From 2009 through the LTM ended Sept 30, 2013, Localiza's FFO
Adjusted Leverage averaged 2.8x, while the average for its total adjusted
debt/EBITDAR ratio was 2.8x and its net adjusted debt/EBITDAR ratio was 2.1x.
The company's debt consists primarily of debenture issuances (67%) banking
credit lines (31%). Fitch expects Localiza to keep a net adjusted debt/EBITDAR
ratio below 2.5x in the long term.
KEY RATING DRIVERS
The ratings could be downgraded due to a combination of higher leverage, lower
liquidity, and/or a significant deterioration in the used car market in
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 5, 2013
- 'National Scale Ratings Criteria', dated Oct 30, 2013
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
National Scale Ratings Criteria
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